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What kind of a role can Adam Smith have in law?

Economic Analysis of Law

In a case, a lawyer takes position depending on the side of her client. However when it comes to academics and policymakers, they must follow some principles and interpret the law according to the same principle in order to be viable. Is this principle ‘equity’, ‘justice’, ‘equality’? These concepts cannot serve as more of a wish.

Are there measurable and determinable goals of law? If there is not, then law cannot be defined as a social science. In my opinion it is not a science at all due to it’s normative nature. If you ask the meaning of a legal provision to two different lawyers, you may get even three distinct responses! How can we approximate law to social sciences? Of course by using scientific methods while interpreting it..

One of the pioneers of Law & Economics doctrine, Ronald Coase defines legal rules as shadow price of our behaviours. That is to say, just like the exchanges in the market, legal rules’ sanctions (eg. the fine you get when you produce a sub-standard material) operate as prices of our choices. Thus, as rational individuals, we compare the cost of breaching the law (to produce the material under the standards) and that of minimizing the risk in order not to be exposed to the sanction (using more expensive material and complying with the standards). If the former’s cost is more, then we are incentivised to produce healthy materials, since it would be costlier to get punished. It must be born in mind that every new regulative tool generates it’s own costs as well!

Law & Economics doctrine analyses norms from this perspective and helps to determine a policy of law. If a rule is economically efficient (Kaldor-Hicks superior), then it is justified. This analysis provides policymakers a quantitative way to decide which rules to enact and which areas to regulate.


Image source: Flickr

Cem Veziroğlu

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