Importance of Economics in Law

Importance of Economics in Law[1]

Author: Ms. Vaishali MalhotraKurukshetra University.


Economics is a subject matter that is based upon human behavior which plays a very prominent role in many aspects of the law. Economics is always interested to know law and as per my opinion, every lawyer should know about economics concept as law deal with many of the concepts that are related to economics. And sometimes equitable knowledge should be there for a lawyer to depict the actual reasons behind the fluctuating economy parallel to the crimes in the society. The emergence of economics in-law makes the easy task for an observer to analyze the law and economy as a whole. It is somehow gain popularity because of various eminent economics and jurists.

Meaning of economic analysis of law

In simple words, economic analysis of law refers to the applying of economic theories to the matters of law which is specifically the microeconomic theories rather than the macro Economic theories. The application of economics into the law system originated from The scholars of Chicago school of Economics where they used to explain the effect of laws and rules of law with the help of economic concepts. Moving further, economic analysis of law can be taken as an application of economic tools to the law for the better understanding of the economy as well as monitoring the economic factors in law and society

Historical background of economic analysis of law

In 1960, an eminent scholar named Ronald Coase who later got  Nobel Prize firstly introduced the concept of economic analysis of law in an article named ” The Problem of Coase” mention the concept of economic analysis of law. Along with this, Friedrich Hayek also wrote about the same concept. Afterward, Richard who is an eminent economics scholar published a journal named “Economic Analysis of Law “where he discussed the same matter. Then in modern latest developments proved the necessity of economics in the field of law.

Importance of economics in law

  1. Economic laws are the statement of cause and effect

By this statement, we meant that atomic as well as law is concerned with the cause and effect relationship that means it focuses on the relationship between one thing which is affecting another thing, for example, the relationship between the substitute and the complementary goods.

  1. Economics helps in better interaction with human behavior

The primary objective of the law is to video from the infringement from his basic rights which means the law is rotated towards human behavior and has to build a proper and better interaction with the humans to provide the settlements for their disputes arising out of the economic factors in the economy. Therefore, we can easily say that economics helps in better interaction with human behavior.

  1. Regulation of various bodies needs a better understanding of Economics

Every aspect of the economy like cash flow, demand, supply, utility, etc. Therefore, proper enactments related to these concepts need a basic understanding of economics. Moreover, the regulation of various bodies governing these concepts needs proper law constituting them. For example – RBI, LIC, SEBI, etc.

  1. Economics helps in understanding the negative externalities in various law subjects
  2. Economics helps in understanding tax laws

Economics helps in understanding tax laws directly or indirectly economics helps in understanding various concepts of tax laws. For example, the economics of taxation pocket on the problems concerned with the levying of taxes. As we know Economics deal with the issues of the economy alike law is concerned with the issues related to the society.

  • Economic help in understanding the company law

Company Law or we can say business law, in other words, is concerned with the corporate sector which includes various terms and definitions which early man can’t understand without understanding the concept of Economics. Therefore we can say that company law can be understood to the people having a piece of basic knowledge regarding economics.

Edward Darcy Esquire v Thomas Allin of London Haberdasher, 1620

It is one of the leading cases of English law also known as the case of monopoly where the question arises on the concept of “monopoly” which of both economics and law. In this case, there was a person named Edward Darcy who is the plaintiff of the case and the groom Queen Elizabeth who received a licence court and sell the playing cards to England and the Monopoly right word given to the Edward Darsi. The defendant what I need to sell his own playing cards to which the monopoly was given to the plaintiff. Planting sue him for the damages. Court held that the Monopoly right given by the queen was invalid in the opinion of court Thus court doesn’t make the defendant liable.

  • Economics helps in understanding consumer protection law

Economic directly or indirectly helping the understanding of consumer protection that is covered under the Consumer Protection Act which is enacted for the protection of consumers and encroachment of their rights as a consumer of the goods and services. Therefore, the basic understanding of Economic helps in understanding Consumer Protection laws.

Lakhanpal National Ltd. v. MRTP Commission,1989

In this case, the appellant company was manufacturing NOVINO (dry cell) batteries in collaboration with M/s. Mitsushita Electric Industrial Company of Japan, and not with National Panasonic of Japan but using their techniques and the representation that NOVINO batteries are manufactured in a joint venture or in collaboration with National Panasonic is false and misleading constituted unfair practices thus relates to the consumer protection law as well as protection of individuals rights from encroachment.

  • Economics helps in understanding property laws

Economics talks about the availability of resources in our country, size, and characteristics of the population of our country, their expectations and preferences, the institutional framework for the people to execute in the territorial boundaries of a country. Economic provides detailed information all the above said categories which enable lawmakers to enact property laws after determination of these factors for the citizens of the country to be applied to them.

  • Laws related to the limited resources can only be understood by having a basic knowledge of Economics.

As we know India is a diverse country having very limited resources for example water, petroleum and many others. For that purpose, to conserve these resources proper rules and regulations are to be introduced in various legislation or promulgations to sustainable development. For example, Water (prevention and control of pollution) act of 1974 have been enacted

  • Concept of uncertainty and expectations taught by economics in law

As we know economics to deal with unlimited wants and limited resources thus comprises greater expectations. And for the accomplishment of these expectations wants, normally people used to do unfair means to attain it. For that purpose, proper legislation is to be made in the law itself which reflects the significance of economics in lawmaking.

  • Economics act as a critical examination of lawmaking

There is no doubt that economics deals with each and every sector of the economy. Therefore, for the enactment of necessary legislation, we have to consider the parameters of economics. Economics exam board critical examination for the present situation of the economy which helps in enactment of various promulgations related to the economy.

Criticism faced by economic analysis of law

Criticism faced by economic analysis of law is discussed in the following points :

  1. As per critics, economic analysis of law missed out various important variables.
  2. According to the people are not rational maximizes of individual preferences which eminent economists assume them to be.
  3. Economic analysis of law is interdeterminant in nature.
  4. Sometimes economic analysis of law generates undesirable and unjust outcomes.
  5. According to critics, economic analysis of law resulted in the generation of commodification which is a serious problem