ics Economics as a Science and its relevance to Law
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. Relationship to other disciplines and approaches As used by lawyers and legal scholars, the phrase "law and economics" refers to the application of microeconomic analysis 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, constitutional economics and political science. 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," though from a vastly different perspective. The one wing that represents a non-neoclassical approach to "law and economics" is the Continental (mainly German) tradition that sees the concept starting out of the governance and public policy (Staatswissenschaften) approach and the German Historical school of economics; this view is represented in the Elgar Companion to Law and Economics (2nd ed. 2005) and—though not exclusively—in the European Journal of Law and Economics. Here, consciously non-neoclassical approaches to economics are used for the analysis of legal (and administrative/governance) problems. Origin and history As early as in the 18th century, Adam Smith discussed the economic effects of mercantilist legislation. However, to apply economics to analyze the law regulating nonmarket activities is relatively new. A European law & economics movement around 1900 did not have any lasting influence. In 1961, Ronald Coase and Guido Calabresi independently from each other 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. Harold Luhnow, the head of the Volker Fund, not only financed Friedrich von Hayek in the U.S. starting in 1946, but he shortly thereafter financed Aaron Director‘s coming to the University of Chicago in order to set up there a new center for scholars in law and economics. The University was headed by Robert Maynard Hutchins, a close collaborator of Luhnow‘s in setting up this ―Chicago School.‖ The University already had Frank Knight, George Stigler, Henry Simons, and Ronald Coase – a strong base of libertarian scholars. Soon, it would also have 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. The historians Robert van Horn and Philip Mirowski described these developments, in their ―The Rise of the Chicago School of Economics‖ chapter in 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). Van Horn (a Hayek critic) filled in yet more details of this history in a Seattle University Law Review article (―Chicago‘s Shifting Attitude Toward Concentrations of Business Power [1934-1962]‖) explaining how the influence of Luhnow and other corporate funders wrenched the Chicago School away from its predecessors‘ common support for anti-trust. Van Horn argues that the opposition to antitrust, and the acceptance of corporate monopoly power and control by oligopolies (such as Germany‘s and Italy‘s fascists had always supported), which came to be championed by Robert Bork and others at Chicago, had their actual origins in America‘s corporate boardrooms. In 1958, Director founded the Journal of Law & Economics, which he co-edited with Nobel laureate Ronald Coase, and which helped to unite the fields of law and economics with far-reaching influence. In 1962, he helped to found the Committee on a Free Society. Director's appointment to the faculty of the University of Chicago Law School in 1946 began a half-century of intellectual productivity, although his reluctance about publishing 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 as U.S. Attorney General in the Ford administration. After retiring from the University of Chicago Law School in 1965, Director relocated to California and 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. 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. He began at Rochester, worked at Miami, but was soon made unwelcome, moved to Emory, and ended up at George Mason. The latter soon became a center for the education of judges—many long out of law school and never exposed to numbers and economics. Manne also attracted the support of the John M. Olin Foundation, whose support accelerated the movement. Today, Olin centers (or programs) for Law and Economics 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 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

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. Economics and its relevance to Law Law and economics or economic analysis of law is the application of economic theory (specifically microeconomic theory) to the 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 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. Criticisms 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 drawn from other, competing frameworks. Yet, less traditional schools of thought have emerged and applied to the work of law and economics in, for example, the work of Edgardo Buscaglia and Robert Cooter on "Law and Economics of Development." Rational choice theory 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. Some of the heaviest criticisms of the "classical" law and economics come from the critical legal studies movement, in particular Duncan Kennedy and Mark Kelman.

Pareto efficiency Relatedly, additional critique has been directed toward the assumed benefits of law and policy designed to increase allocative efficiency when such assumptions are modeled on "first-best" (Pareto optimal) generalequilibrium conditions. Under the theory of the second best, for example, if the fulfillment of a subset of optimal conditions cannot be met under any circumstances, it is incorrect to conclude that the fulfillment of any subset of optimal conditions will necessarily result in an increase in allocative efficiency. Consequently, any expression of public policy whose purported purpose is an unambiguous increase in allocative efficiency (for example, consolidation of research and development costs through increased mergers and acquisitions resulting from a systematic relaxation of anti-trust laws) is, according to critics, fundamentally incorrect, as there is no general reason to conclude that an increase in allocative efficiency is more likely than a decrease. Essentially, the "first-best" neoclassical analysis fails to properly account for various kinds of generalequilibrium feedback relationships that result from intrinsic Pareto imperfections. Another critique comes from the fact that there is no unique optimal result. Warren Samuels in his 2007 book, The Legal-Economic Nexus, argues, "Efficiency in the Pareto sense cannot dispositively be applied to the definition and assignment of rights themselves, because efficiency requires an antecedent determination of the rights (23-4)." Responses Law and economics has adapted to some of these criticisms (see "contemporary developments," below). One critic, Jon D. Hanson of Harvard Law School, argues that our legal, economic, political, and social systems are unduly influenced by an individualistic model that assumes "dispositionism"—the idea that outcomes are the result of our "dispositions" (economists would say "preferences"). Instead, Hanson argues, we should look to the "situation", both inside of us (including cognitive biases) and outside of us (family, community, social norms, and other environmental factors) that have a much larger impact on our actions than mere "choice." Hanson has written many law review articles on the subject. Contemporary developments Law and economics has developed in a variety of directions. One important trend has been the application of game theory to legal problems. Other developments have been the incorporation of behavioral economics into economic analysis of law, and the increasing use of statistical and econometrics techniques. Within the legal academy, the term socio-economic has been applied to economic approaches that are self-consciously broader than the neoclassical tradition.