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Economic Analysis

Economic analysis of law emerged in the 18th century with Adam Smith's work explaining the relationship between law and economics. A major school influencing the field is the Chicago School, whose prominent advocates like Richard Posner and Oliver Williamson generally support deregulation and privatization and oppose restrictions on free markets. The most influential economic analyst of law is Ronald Coase, whose work argued that firms exist to reduce transaction costs and that with no transaction costs, legal rulings would not affect the allocation of resources as people could always bargain to an efficient outcome. Coase and others wanted to change the approach to law and regulation by requiring proof of positive effects from government interventions in markets.

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26 views2 pages

Economic Analysis

Economic analysis of law emerged in the 18th century with Adam Smith's work explaining the relationship between law and economics. A major school influencing the field is the Chicago School, whose prominent advocates like Richard Posner and Oliver Williamson generally support deregulation and privatization and oppose restrictions on free markets. The most influential economic analyst of law is Ronald Coase, whose work argued that firms exist to reduce transaction costs and that with no transaction costs, legal rulings would not affect the allocation of resources as people could always bargain to an efficient outcome. Coase and others wanted to change the approach to law and regulation by requiring proof of positive effects from government interventions in markets.

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JS DS
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Economic analysis[edit]

Main article: Law and economics


In the 18th century Adam Smith presented a philosophical foundation
for explaining the relationship between law and economics.[52] The
discipline arose partly out of a critique of trade unions and
U.S. antitrust law. The most influential proponents, such as Richard
Posner and Oliver Williamson and the so-called Chicago School of
economists and lawyers including Milton Friedman and Gary Becker,
are generally advocates of deregulation and privatisation, and are
hostile to state regulation or what they see as restrictions on the
operation of free markets.[53]

Richard Posner, one of the Chicago School, runs a blog with Bank of Sweden
Prize winning economist Gary Becker.[54]
The most prominent economic analyst of law is 1991 Nobel
Prize winner Ronald Coase, whose first major article, The Nature of
the Firm (1937), argued that the reason for the existence of firms
(companies, partnerships, etc.) is the existence of transaction
costs.[55] Rational individuals trade through bilateral contracts on open
markets until the costs of transactions mean that using corporations to
produce things is more cost-effective. His second major article, The
Problem of Social Cost (1960), argued that if we lived in a world
without transaction costs, people would bargain with one another to
create the same allocation of resources, regardless of the way a court
might rule in property disputes.[56] Coase used the example of
a nuisance case named Sturges v Bridgman, where a noisy
sweetmaker and a quiet doctor were neighbours and went to court to
see who should have to move.[57]Coase said that regardless of
whether the judge ruled that the sweetmaker had to stop using his
machinery, or that the doctor had to put up with it, they could strike a
mutually beneficial bargain about who moves that reaches the same
outcome of resource distribution. Only the existence of transaction
costs may prevent this.[58] So the law ought to pre-empt
what would happen, and be guided by the most efficient solution. The
idea is that law and regulation are not as important or effective at
helping people as lawyers and government planners believe. [59] Coase
and others like him wanted a change of approach, to put the burden of
proof for positive effects on a government that was intervening in the
market, by analysing the costs of action.[60]

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