RELATION BETWEEN ECONOMICS AND LAWS

WHAT IS LAW?

~ What is ‘LAW’, how do we know it exists and how is it defined? By asking you to think about what you mean when you use the word ‘LAW’, we are asking you to draw upon your own knowledge, views and experience. The ‘LAW’ is rarely out of the news and is often the focus for fictional drama. It is something that touches our lives on a daily basis, it governs what we can and cannot do, it is used to settle disputes, to punish and to govern. There are laws which are widely accepted and laws which generate controversy. Laws play a central role in society and in social, political and economic life. Many people think they know what the law is when they see it and your individual viewpoint will affect how you define law.

WHAT IS ECONOMICS?

But before answering this question we would like to ask you some basic questions to give you a slight context of the topic.
● Why are some countries rich and some countries poor and why is the crime rate of rich countries lower than that of poor countries?
● How can data help us understand the world and frame the laws accordingly?
● Why do we ignore information that could help us make better decisions?
● What causes recessions and What are the possible ways/laws to avoid recession ?

Economics can be defined in a few different ways. It’s the study of scarcity, the study of how people use resources and respond to incentives, or the study of decision-making. It often involves topics like wealth and finance, but it’s not all about money. Economics is a broad discipline that helps us understand historical trends, interpret today’s headlines, and make predictions about the coming years. Economics ranges from the very small to the very large. The study of individual decisions is called microeconomics. The study of the economy as a whole is called macroeconomics. A microeconomist might focus on families’ medical debt, whereas a macroeconomist might focus on sovereign debt.

A RELATION BETWEEN ECONOMICS AND LAW.

We are going to keep it very basic for a better understanding of the concept. We think that both the concepts are very wide but at some point interlinked to each other. To understand it more clearly think of it as:

ECONOMICS- deals with the Policy
LAW– deals with Enforcement
So one is like designing something and the other is about enforcing or executing the design. There must be some different answers to it but the way we perceive it is that LAW and ECONOMICS are linked with two major economic concepts or legal concepts.

1. HUMAN BEHAVIOUR
2. HUMAN WELFARE

FOR EXAMPLE:

The First thing common between both the topics:

ECONOMIC with all its analysis deals with Human Behaviour. It wants to create incentives for people to do or not to do things. So an economist talks about creating regulation to change human behaviour.
LAW also does the same thing with enforcing the regulation to change human behaviour.

The Second thing common between both the topics:

Economics deals with Human welfare, all of the economics discussions are for human welfare. What kind of Regulation structure are there or what kind of Institutional structure may be designed in order to increase human welfare. Law does the same thing, If a criminal is punished under the law human welfare increases.

So When you study LAW and ECONOMICS, What is the key issue that we talk about?

As we all know law is not fixed it changes as the society grows or makes cultural, economical amendments. So how do you design better Laws as the society changes or grows culturally or economically? As the society grows the human behaviour changes and the policy should be made in order to keep this in mind. (If you can see the importance of economics and the link we tried showing above as how economics is used to design the policy about human behaviour and how law passes the enforcement to enact it for betterment of human welfare) To understand this Designing and Enforcement Let’s take an example:

Due to overspeeding and jumping of redlights there is an increase in road accidents. To tackle this problem the government passed a policy regarding overspeeding and jumping of redlights. In the policy the government fixed a fine of a particular amount.

Now there are some questions in front of the government

~Whether the law is working properly?
~Is there any decrease in the number of road accidents?
~Whether the law is cost effective or not?

So to tackle this problem of road accident, there were two major reasons i.e Overspeeding and Jumping of Redlights as there were already red lights and signs of speed limit the government needed to come out of a different way so the government with the help of economist  conducted an analysis and came out with the idea of Fine. Now the fine should be cost effective! There should be a decrease in the number of road accidents! So overall if there is a decrease in the number of road accidents the law is economically efficient.

Now let’s take an example of Market Oriented Economics.

~ There is a property which is economically free and is for the public. So In Market-Oriented Economics if a property is economically free then it is subjected to law as without the guidance of law there will be chaos publicly. I hope you are understanding our point where I’m going with this. The best example of the relation between economics and law:

THE ECONOMIC POLICY OF 1991

(Under DR. Manmohan Singh) and we all know how it helped India to shape its economy. New Economic Policy of India was launched in the year 1991 under the leadership of P. V. Narasimha Rao. This policy opened the door of the India Economy to global exposure for the first time. In this New Economic Policy P. V. Narasimha Rao government reduced the import duties, opened reserved sectors for the private players, devalued the Indian currency to increase the export. We don’t want to describe the whole economic policy but the three main objective of the Policy were:

1. Liberalisation
2. Globalization
3. Privatisation

I just wanted to ask you one question: Why was India lagging behind with the old laws? How did after the new laws the economy got so stable that it shaped our today’s economy?  Economists analyzed the law and thereforms it needed. They studied what possible reforms it needed
and changed the policy according to that. ANOTHER SUCH EXAMPLE IS OF GST.

ECONOMICAL ANALYSIS OF TORT

1. Compensation for accidents
What if the accidents cannot be avoided?

2. Cost of prevention
What is the prevention cannot be possible

3. Cost of consequences
What is cost of products liability (to make it more safer)

4. Expected accident cost

ALL These factors will decide the actual compensation that will be provided to the person involved in t0he accident. The study and analysis of these factors is done by Economical Analysis.

ECONOMICAL ANALYSIS OF CONTRACT

For example a contract is entered into for the purpose of building a house. The estimated cost is 50 lacs and contract is agreed and the builder agreed to build it for 50 lacs. Before the performance is due there is a lot of inc in building material cost and with that cost the completion of building requires an investment of 70 lacs. Now there is conflict between the parties about who is going to invest 20 lacs more. If the builder pays it out of his pocket he will suffer a loss of 20 lacs and the contract also provides liquidated damages if the person doesn’t fulfill his part of
obligation. So the liquidated damages was tuned in to be not more than 5 lacs. Therefore there would be a decision to commit breach of contract instead of performing it. Therefore most of the contracts have an escalation clause on how far it is effective when it is going to offset the difference in cost compared on date of agreement and date of agreement.

By the end of this research I have no doubt why there is mention of economic justice in our Preamble.

OUR OPINION

Why Should Lawyers Study Economics? Why Should Economists Study Law? The economic analysis of law unites two great fields and facilitates understanding each of them. You probably think of laws as promoting justice; indeed, many people can think in no other way. Economics conceives of laws as incentives for changing behavior (implicit prices) and as instruments for policy objectives (efficiency and distribution).

However, economic analysis often takes for granted such legal institutions as property and contract, which dramatically affect the economy. Thus, differences in laws cause capital markets to be organized differently in Japan, Germany, and the United States. Failures in financial laws and contracting contributed to the banking collapse of 2008 in the United States and the subsequent recession, which was less severe in Japan and Germany. Also, the absence of secure property and reliable contracts paralyzes the economies of some poor nations. Improving the
effectiveness of law in poor countries is important to their economic development. Law needs economics to understand its behavioral consequences, and economics needs law to understand the underpinnings of markets.

Economists and lawyers can also learn techniques from each other. From economists, lawyers can learn quantitative reasoning for making theories and doing empirical research. From lawyers, economists can learn to persuade ordinary people—an art that lawyers continually practice and refine. Lawyers can describe facts and give them names with moral resonance, whereas economists are obtuse to language too often. If economists listen to what the law has to teach them, they will find their models being drawn closer to what people really care about.

Author: VANSH CHAUHAN,
MAHARAJA AGRASEN INSTITUTE OF MANAGEMENT AND STUDIES / BA.LLB