The objectives mentioned in the Preamble of the Constitution are: Justice – Social,

Economical and Political.1

Social justice means (1) to remove economical inequalities; (2) to provide a decent standard
of living to the working people; (3) to promote the interest of the weaker sections of the
society.

Our economy is a market-oriented economy based on private enterprises. This implies two
conditions – first, that all property can be privately owned and second, that people are
economically free.2

First of all we need to understand the concepts of law and economics. Subsequently, we will
deal with the relationship which both the disciplines share.

 LAW

What is law? There are an endless number of definitions given by various jurists,
nobles. But, a simple definition of law would be that law aims at social control. It
regulates the behaviour pattern of an individual in relation to other individuals, to
himself and the society on a whole. Social control in its original sense means the
control in the society. Society consists of values. The values are of innumerable types.
They are in endless number. The society consists of culture, economy, castes,
religion, and region. With such a wide scope law is bound to have control over each
of the above mentioned aspects. The above then simply implies that law is the aim of
social control and it has covered under its purview many aspects, and economy is one
of them.

 ECONOMICS

Like law, there are many definitions to economics too, but a simple definition would
be the production and consumption of services. Now, when there is production and
consumption there are bound to be some rules and regulations which are applicable to
both the sides, that is the production and the consumption side as well. So those rules
and regulations are the law, which has a very close relationship with the economics.

1
Directive Principles of State Policy, Part IV
2
Elvin Thomas, Economics, Hodder and Stoughton, England, 1976 Page No. 15
 Moreover, it is important to mention here that the problems related to poverty,
unemployment, instability in the economy also come under the ambit of law. It has to
keep a check on them and economics is the basis for all kinds of subsequent policies.3

Law and economics or basically, the economic analysis of law is an approach to legal theory
that applies methods of economics to law. It includes the use of economic concepts to explain
the effects of laws to assess which legal rules are economically efficient and to predict which
legal rules will be promulgated.

Economic Analysis of Law

“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. In
simple terms, 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 (judge-made law, the main body of law in England and
its former colonies, including the United States) 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.4

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.

The second characteristic of law and economics is its emphasis on incentives and people’s
responses to these incentives. For example, the purpose of damage payments in accident
(tort) law is not to compensate injured parties, but rather to provide an incentive for potential
injurers to take efficient (cost-justified) precautions to avoid causing the accident. 5 Law and
economics share with other branches of economics the assumption 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.

3
Paul Burrows and others (Ed.): The Economic Approach to law (1981), Butterworths, London, Page No. 32
4
www.hg.org; < http://www.hg.org/economic-law.html> last retrived on 12-10-2010
5
www.econlib.org; < http://www.econlib.org/library/Enc/LawandEconomics.html> last retrieved o 12-11-2010
The private legal system must perform three functions; all related to property and property
rights. First, the system must define property rights; this is the task of property law itself.
Second, the system must allow for transfer of property; this is the role of contract law.
Finally, the system must protect property rights; this is the function of tort law and criminal
law. These are the major issues studied in law and economics. 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.6

History and Significance

Modern law and economics dates from about 1960, when RONALD COASE (who later
received a Nobel Prize) published “The Problem of Social Cost.” Gordon Tullock
and FRIEDRICH HAYEK also wrote in the area, but the expansion of 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 major advocate of the positive theory of
efficiency, published the first edition of Economic Analysis of Law and founded the Journal
of Legal Studies, both important events in the creation of the field as a thriving scholarly
discipline. Posner went on to become a federal judge while remaining a prolific scholar. An
important factor leading to the spread of law and economics in the 1970s was a series of
seminars and law courses for economists and economics courses for lawyers, organized by
Henry Manne and funded, in part, by the Liberty Fund.7

The discipline is now well established, with eight associations, including the American,
Canadian, and European law and economics associations, and several journals.1 Law and
economics articles also appear regularly in the major economics journals, and the approach is
common in law review articles. Most law schools have faculty trained in economics, and
most offer law and economics courses. Many economics departments also teach courses in
the field. A course in law and economics is very useful for undergraduates contemplating law
school. Several consulting firms specialize in providing economic expertise in litigation.

The reasons are:

Lawyers study Law and Economics - a) Economics provides fundamental organising

principles for the whole body of law, b) It helps in simplifying the law (i.e., avoiding the evils
of current legal formalism); and, c) It focuses on the real-life effects of the law, including
possible adverse effects such as, rent control, protection of weak contract parties. Economists
6
www.econlib.org; <http://www.econlib.org/library/Enc/LawandEconomics.html> last retrieved on 11-11-2010
7
www.iitk.ac.in; <http://www.iitk.ac.in/infocell/announce/law_eco/content.htm> last retrieved on 12-11-2010
study Law and Economics  -a) Economic theory does not operate in an institutional vacuum;
and, b) Study of law allows economists to model real life situations. Professionals study Law
and Economics -a) need to understand the damages that may result from the use of their
products or services; b) Improving skills in IPRs may provide material awards and
recognition to the inventors and contributors for their investment; and, c) Study, over all, may
provide an opportunity to the professionals to enhance skills in establishment of contracts
among the stakeholders of resources and users of goods or services, handling of liability, etc.8

Economic analysis of law is a new concept to Indian academic institutions. Keeping in view
of changing socio-economic, technical, and legal environment, in developing countries like
India, there is a need for trained scholars in the interdisciplinary field of law and economics.
The proposed course provides an opportunity to academicians, technocrats, and policy
makers to enhance their skills in Law and Economics.

The field of law and economics asks two basic questions: (1) what are the effects of legal
rules on the behaviour of relevant actors? And (2) are these effects of legal rules socially
desirable? It has the objective of applying an economic approach not merely to the areas of
economic regulation, but to all areas of law, in particular, to the core of the common law. In
fact, the antitrust field is the most active area where economics interrelates with law. For
instance, United States v. Microsoft9 is a landmark case of antitrust intervention in network
industries. The United States Department of Justice and 19 States sued Microsoft alleging (i)
that it monopolized the market for operating systems of personal computers and took anti-
competitive actions to illegally maintain its monopoly; (ii) that it attempted to monopolize the
market for Internet browsers because such browsers would create competition for operating
systems; (iii) that it bundled its browser (Internet Explorer) with Windows; and that it
engaged in a number of other anti-competitive exclusionary arrangements with computer
manufacturers, Internet service providers, and content providers attempting to thwart the
distribution of Netscape's browser. The case was settled after a long legal proceeding and
Microsoft agreed to severe restraints on its conduct. The case raised issues about liability and
the effectiveness of the remedies including the breakup of Microsoft into two companies.

However, economics has gone beyond traditional areas to undertake research on consumer
protection, environmental protection, intellectual property rights, information technology,
8
David Friedman (1987); Law and Economics; “The New Palgrave: A Dictionary of Economics”, v. 3, p. 144.
9
WL 614485
medical malpractice, criminal justice, marriage and divorce, accident prevention, racial
discrimination, land use planning, etc., where economic interests often dovetail those of law.
Moreover, economics provides both the behavioural theory and a normative standard that
legal theory lacked. The behavioural theory treats (law like prices) as an incentive for
behaviour. The Normative theory of efficiency is non controversial as broad guide to policy.
The law's overwhelming concern is justice and focuses on how a pie of a given size is
divided. Economics, on the other hand, concentrates on the efficient use of resources to
produce the largest pie possible. Thus, the economy must be seen as an object of legal control
and the law as a means of seeking private economic gain.10

To determine ‘efficient' solutions, as Posner envisages them, requires that the gains resulting
from a change of rule be weighed against the losses, in order to choose the rule which
promises the optimal result. The question then arises as to the scale on which the gains and
losses occurring to different people are to be weighed. In a science court, the judge must put a
figure on the losses suffered by a tort victim. If tort rules must serve to induce potential
tortfeasors to take proper care, accident costs falling on the side of the victim must be
compared to prevention costs falling on the side of the tortfeasor. According to Posner the
courts, at least during the nineteenth century, determined the defendants' liability on the basis
of an economic test. Moreover, the efficiency theory asserts that the economic version of the
Hand Test “expresses a general test of liability at common law”. According to Judge Hand,
the defendant is negligent if the likelihood of injury multiplied by the gravity of the
injury exceeds the burden of adequate precaution. In fact there are several reasons why
economics is particularly suited to analyzing the common law. First, common law
adjudication necessarily involves the judge in making a choice. Since economics is the study
of choice the decision of judges is an appropriate subject for economic study. Second, both
economics and the common law are based on individualistic premises. Third, economics
stresses that choice involves the weighing of costs and benefits.11

10
www.iitk.ac.in; <http://www.iitk.ac.in/infocell/announce/law_eco/content.htm> last retrieved on 12-11-2010

11
Ibid