Law and Economics

Law and economics is a theory of law based on the proposition that legal rules can be interpreted as a system of incentives aimed at inducing people to behave in certain socially desirable ways. Underlying this view is a presumption that people are rational; that is, they respond to perceived costs and benefits in ways that further their self-interest. While such an assumption is standard in the analysis of market behavior, it is less obvious that it should also operate in the legal realm, especially in such areas as the common law of torts, family law, and criminal law, where financial or material gain are not necessarily the primary objectives. The application of economic analysis to these and many other areas of law has nevertheless proved extremely successful.

The so-called “new” law and economics is of relatively recent origin, emerging in the 1960s. Prior to that, the application of economic analysis to legal issues (the “old” law and economics) was primarily limited to the field of antitrust law, or the legal regulation of markets. But when Ronald Coase published a classic article on social cost in 1960, Guido Calabresi applied economic principles to tort law in 1961, and Gary Becker developed an economic analysis of criminal law in 1968, the stage was set for the application of economic theory to an ever-expanding array of legal fields not obviously economic in nature.