Law and economics, or economic analysis of law, is the application of microeconomic theory to the analysis of legal rules and institutions. The field emerged in the United States in the early 1960s, primarily through the work of scholars from the Chicago school of economics, such as Aaron Director, George Stigler, and Ronald Coase, and jurists, including Guido Calabresi. The field uses economics concepts to explain the effects of laws, assess which legal rules are economically efficient, and predict which legal rules will be promulgated. There are two major branches of law and economics. One is based on applying the methods and theories of neoclassical economics to the positive and normative analysis of the law. The second branch focuses on an institutional analysis of law and legal institutions, with a broader focus on economic, political, and social outcomes, and overlapping with analyses of the institutions of politics and governance.
History
Origin The historical antecedents of law and economics can be traced back to the classical economists, who are credited with establishing the foundations of modern economic thought. As early as the 18th century, Adam Smith discussed the economic effects of mercantilist legislation; later, David Ricardo opposed the British Corn Laws because they hindered agricultural productivity; and Frédéric Bastiat, in his influential book The Law, examined the unintended consequences of legislation. However, applying economic analysis to the law regulating non-market activities is relatively new. A European law-and-economics movement around 1900 had no lasting influence. In a 1917 article analyzing the study of law and economics in American universities, Eugene Allen Gilmore concluded, "the relation between law and economics seems either not to be perceived, or, if perceived, not to be regarded as a relationship desirable or feasible of very much cultivation." However, writings of John R. Commons and Robert Lee Hale had brought economic thinking to law and legal institutions as early as 1909. Harold Luhnow, the head of the Volker Fund, financed F. A. Hayek in the United States starting in 1946; he shortly thereafter financed Aaron Director's appointment to a faculty position at the University of Chicago to establish a new center for scholars in law and economics at the institution. The university was headed by Robert Maynard Hutchins, a close collaborator of Luhnow's in establishing the Chicago School, as it came to be known. The university faculty then included a strong base of libertarian scholars, including Frank Knight, George Stigler, Henry Simons, Ronald Coase, and Jacob Viner. Soon, it would also include not just Hayek himself, but Director's brother-in-law and Stigler's friend Milton Friedman, and also Robert Fogel, Robert Lucas, Eugene Fama, Richard Posner, and Gary Becker. Historians Robert van Horn and Philip Mirowski described the development of modern economic concepts in "The Rise of the Chicago School of Economics", a chapter of The Road from Mont Pelerin (2009); and historian Bruce Caldwell (a great admirer of von Hayek) filled in more details of the account in his chapter, "The Chicago School, Hayek, and Neoliberalism", in Building Chicago Economics (2011). The field began with Gary Becker's 1968 paper on crime (Becker also received a Nobel Prize). In 1972, Richard Posner, a law-and-economics scholar and the leading advocate of the positive theory of efficiency, published the first edition of Economic Analysis of Law and founded The Journal of Legal Studies, both of which are regarded as important events. Gordon Tullock and Friedrich Hayek also wrote intensively in the area and contributed to the spread of law and economics.
Founding In 1958, Director founded The Journal of Law & Economics, which he co-edited with Nobel laureate Ronald Coase, helping to unite the fields of law and economics and exerting far-reaching influence. In 1960 and 1961, Ronald Coase and Guido Calabresi independently published two groundbreaking articles, "The Problem of Social Cost" and "Some Thoughts on Risk Distribution and the Law of Torts". This can be seen as the starting point for the modern school of law and economics. In 1962, Aaron Director helped to found the Committee on a Free Society. Director's appointment to the faculty of the University of Chicago Law School in 1946 marked the beginning of a half-century of intellectual productivity, although his reluctance to publish left few writings behind. He taught antitrust courses at the law school with Edward Levi, who eventually would serve as Dean of Chicago's Law School, President of the University of Chicago, and U.S. Attorney General in the Ford administration. After retiring from the University of Chicago Law School in 1965, Director relocated to California. He took a position at Stanford University's Hoover Institution. He died September 11, 2004, at his home in Los Altos Hills, California, ten days before his 103rd birthday.
Later development In the early 1970s, Henry Manne (a former student of Coase) set out to build a center for law and economics at a major law school. Ultimately, Manne established a center at George Mason, thar became a hub for the education of judges, many of whom had never previously been exposed to the concepts of law and economics. Manne also attracted the support of the John M. Olin Foundation; Olin centers (or programs) for Law and Economics now exist at many universities.
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 rather than a negligence rule. Positive law and economics have also at times purported to explain the development of legal rules, for example, the common law of torts, in terms of their economic efficiency.
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