The historical background of the relationship between law and economics dates back to the classical economists that are known for creating the basis for modern economics views. Administrative laws are significant channels through which federal governments apply laws and regulations that govern the objective of the agency as well as its economy. An economy requires a specific set of rules to function effectively in the ever-changing economic environment. Absent of a clear legal framework to govern and enforce property rights in a free financial system. Federal and constitutional laws affect every aspect of the economy; however, very few people know the impact of regulations or the process they are conceived. Often, rules create and guide the proper functioning of economies as well as societies. This paper aims to highlight the relationship between the legal system and economic principles and procedures.
The study of law concerning other fields such as sociology, politics, and economics is critical, and several law curriculums are including the study of economics and law. The interest in establishing the relationship between economics and law has risen with more focus on the institutional framework, including the laws that govern economic activities. Establishing the relationship between law and economics is critical in understanding how regulations affect human incentives. The relationship is primarily derived from the application of legal procedures to economic principles. Economic principles are fundamental in drafting laws and evaluating the level of damages necessary to reinstate an individual to the condition they were before an accident occurred. Legal instruments, such as breach of contract often feature in the legal system and often have effects on the economic incentives. An established legal system primarily determines the economic performance of a country.
More emphasis between law and economics is founded based on incentives and individual reactions on incentives. Economics and law, as well as other fields related to economics, have an assumption that people are irrational and often respond to incentives. For instance, the primary aim of payment for damages incurred through an accident (tort law) is to offer an incentive for possible damages and precaution for causing further damages rather than to compensate injured parties. Property law is related to property rights; therefore, the legal system must protect the property of individuals, playing the role of contract law. Moreover, criminal and tort law are responsible for protecting property rights.
Legal instruments act in instances where damages for breach of contract, commonly come about in the legal system and often have an effect on the economic incentive. Lawful questions often arise including whether it is right to issue damages for interrupting production as a result of oil spillage from a tanker. During the earlier days, the relationship had a pedigree since political economists were known to have an acquaintance with legal training.
Modern law and economics dates back from Ronald' work in 1960 "The problem of social cost". Moreover, Becker further delved into the field and expanded the paper in 1968 about crime. Currently, the law is established and spread through various seminars and law causes designed for economists as well as economics courses for lawyers during the 1970s. Presently, economic significantly assist in our understanding of the law as well as the factors that shape the legal system; therefore, existing legal policies in a country assist in the distribution of resources and determination of behavior in the economy. The law serves the purpose of ensuring a social-economic equilibrium is attained in the society as well as socio-economic policies. During the 18th century, it was evident to Adam Smith that the laws governing property inheritance and bad regulations significantly affected industrialisation. Large parcels of land were passed to the eldest sons, a significant part remaining unused, neither were they sold nor leased to prospective investors. Poor policies affect aspects such as mobility of factors of labor where laborers were restricted operating from moving, which brought unintended consequences to the economy.
In earlier years, economists did not give much attention to institutional-related questions. After the 2008 depression that adversely affected America and Europe, where the exceptionally technical nature was heavily criticized. Economists later continued to show interest in policy development to ensure an embodied study of law and economics during the 20th century. During the 1950s, henceforth, economists regarded regulatory issues with more emphasis, mainly on the regulation on monopolies and antitrust. This paved the way for the modern extension of the legal framework and economics with key areas such as property and contracts. Richard Posner (1973) had a significant impact in featuring the economic analysis of law concerning the legal frameworks in his publications, which raised much. Posner pointed out that the common law was and must be effective.
The Link between Legal Systems and Economics
The relationship between legal systems and economics is stated in its adaptability, stability, or certainty. A legal system that functions well is stable and offers certainty to market applicants at a favorable cost. Stability and certainty provide confidence to the participants during the transactions. The legal system's evolution leads to adequate adaptability to the emerging opportunities for economic and social transactions. However, obtaining the necessary balance that connects stability to adaptability is very difficult because stable laws can also be very rigid, leading to creativity and innovation reduction. Additionally, too much flexibility and frequent variation can make the market contributors restrict their behavior by fearing future drastic changes in the law.
The economic history indicates that the implementation of the law can negatively or positively affect the production of an economy and the circulation of income that is linked with production. Also, economic history states that laws can have a significant or real economic impact that influences the total economic output and the comparative positions of various persons and units in society. Economic performance is determined by the development of legal systems in a society. Consequently, economic performance is shaped by the combination of enforcement features, informal standards, and formal regulations. A country experiences dormancy if its legal system is unable to find solutions to societal challenges by failing to adjust to new modifications in the social and economic environment. Economic performance is not only influenced by production changes and consumption choices but also the way laws and norms of a society forms and restrains the actions of economic participants.
Behavioural Economics and Law
The individuals who practice behavioral law and economics study the human restrictions to means-end rationality. Restricted rationality is when information is not managed through a model of faultless means-end rationality, but it is distorted because human beings have limited cognitive capabilities. For example, it is believed that the endowment effect is a behavioral limit that alters the right valuation of property, a vital feature of negotiating to effective results. Referring to the impact, the ownership of properties establishes an illogical cognitive over-valuation of the entities. Additionally, it is claimed that people's cognitive capabilities are biased by approachability exploratory. This is because the accessibility of resilient imagery might encourage people to under or overestimate the factual probability of events linked to the image. For example, graphic images of highly unconvincing harms can be more persuasive on performance; thereby, demanding unfair utilisation of resources than statistical analysis displaying additional unattractive damage to be more usual and easier to evade. Jurisprudential activities can be considerably affected by such outcomes. For example, lawmakers can be irrationally impacted by the accessibility of heuristic, just like the other individuals. So, the influence caused by statements provided by victims can be vital correctives to events if a well-presented defendant's presence within the court skews judge's decisions. As a result, raising sensitivity for such a cognitive failure can assist in adjusting the legal reasoning and decisions. Also, the awareness and utilisation of common cognitive restrictions can enable lawmakers to create more efficient laws.
Direct Economic Impact of Law
Research indicates that law is an essential contributor to economic value either directly or indirectly. In the United Kingdom, legal systems have provided jobs to more than 300,000 individuals. In 2014, the total value of services provided by legal systems was more than twenty-five billion euros to the economy of United Kingdom. Growth in the legal sector leads to the creation of new job opportunities, thereby contributing to economic growth. Any variations to the legislative and regulatory environment for the legal system must be completely considered to inhibit any unplanned results of the changes that could affect their future success. Amongst the goals of the legal systems is contributing to economic growth by providing quality legal services to their clients.
Law as a Tool to Motivate Economic Efficiency
One method used by legal systems to influence economic efficiency in avoiding circumstances that cause market failure. An example of market failure is the occurrence of monopolies whereby, a party extracts more profit from a good than allowed by a healthy market. Laws can be applied to make sure that monopolies are difficult to establish and retain. Also, legal systems can be used to facilitate effective transactions by enforcing valid contacts economically. Courts should ensure compliance with the contractual conditions by providing contractual confidence to the parties involved by making sure that both parties fulfil the agreed commitments particularly if the parties are needed to complete their responsibilities in different period. The Coase Theorem indicates that the allocation of entitlements can be inappropriate to the objective of allocative effectiveness if there is lack of transaction cost. Thus, the implementation and distribution of law enforcement can be utilised to motivate economic effectiveness.
The Law as Economic in Nature
Law is usually used to promote adequate exchanges, but it is a cause of concern when law as an institute is best expressed in terms of economics. Perceiving all law depending on market principles makes its illogic. These contrasting areas have been viewed by the economic analysis of law to be an obligation, misdeed and criminal law when all is focused on economic goals. Not any other theory gives the law a more consistent basis other than this one. In offences about confidential harm(tort case), It is possible to be considered legal when the parties involved before the accident had a mutual agreement that resulted in the occurrence of the accident, and all this is according to Richard Posner. When the gain given by the criminal act is surpassed by the possibility of punishment times the measure of punishment, this scares the criminals. Extensions of economic tools into areas targeting anything dealing with economics have been made easier by Scholars. Economic analysis is allowed in legal ethics and rules of evidence.
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