Role of economics in law

THERE are many ways of looking at a legal system, among them the perspective of a legal historian, a legal philosopher, or a lawyer interested in creating arguments the courts will accept, or contracts they will enforce.

One approach is by economics to try to understand systems of legal rules by asking what consequences they will produce in a world in which rational individuals adjust their actions to the legal rules they face.

If there were only one man in the world, he would have a lot of problems, but none of them would be legal ones.

Add a second inhabitant, and we have the possibility of conflict. Both of us try to pick the same apple from the same branch. I track the sapi or deer I wounded only to find that you have killed it, butchered it, and are in the process of cooking and eating it.

The obvious solution is violence. It is not a very good solution; if we employ it, our little world may shrink back down to one person, or perhaps none.

A better solution, one that all known human societies have found, is a system of legal rules explicit or implicit, some reasonably peaceful way of determining, when desires conflict, who gets to do what and what happens if he doesn’t.

The legal rules that we are most familiar with are laws created by legislatures and enforced by courts and police. But even in our society much of the law is the creation not of legislatures but of judges, embedded in past precedents that determine how future cases will be decided; much enforcement of law is by private parties such as tort victims and their lawyers rather than by police; and substantial bodies of legal rules take the form, not of laws, but of private norms, privately enforced.

Let us assume where the most severe criminal punishment is life imprisonment. Someone proposes that since armed robbery is a very serious crime, armed robbers should get a life sentence.

A constitutional lawyer asks whether that is consistent with the prohibition on cruel and unusual punishment. A legal philosopher asks whether it is just.

An economist points out that if the punishments for armed robbery and for armed robbery plus murder are the same, the additional punishment for the murder is zero and asks whether you really want to make it in the interest of robbers to murder their victims.

That is what economics has to do with law. Economics, whose subject, at the most fundamental level, is not money or the economy but the implications of rational choice, is an essential tool for figuring out the effects of legal rules.

Knowing what effects rules will have is central both to understanding the rules we have and to deciding what rules we should have.

The idea of a thing belonging to a person is fairly clear when the thing is an automobile or a pair of pants. It is less clear when the thing is a piece of land.

What rights does my ownership give me? Almost certainly I can farm the land, or build on it, or keep off trespassers.

But can I prevent drones or airplanes from flying over it, miners from tunneling under it, neighbors from making loud noises near it? If it is my land, does that mean I can forbid radio stations from broadcasting without my permission, on the theory that if I can pick up the signal, the radio waves must be trespassing on my property?

What I own is not a thing called land but a bundle of rights. Some rights almost always go in the bundle associated with a particular piece of land, such as the right to walk on it and forbid others from doing so.

Other rights associated with the land, such as the right to forbid trespassers at various distances above or below it and the right to have the surface stay put instead of sliding into someone else’s tin mine, may or may not be found in the same bundle.

For a non-economist the first and most obvious question about private property is why we have such a silly institution. Why not forget selfish notions of thine and mine and let everyone use everything whenever he needs it?

There are two reasons why that does not work. The first is that you and I cannot simultaneously drive the same car to different places, nor can I drive my car very far if your previous use has left it with an empty gas tank and a flat tire.

We need some way of deciding who gets to use what when, preferably a way that results in the person to whom something is most valuable getting it.

Private property and exchange solve that problem. If the use of my property is more valuable to you than to me, you will be willing to offer a price that I will be willing to accept.

The second reason is that most of the things we treat as private property are things that somebody must make, and making things is costly.

If making things results in owning them, that gives you a reason to make them. Not only does it provide an incentive, it provides the right incentive: You will make something if and only if its value to whoever values it most, either you or the person you plan to sell it to, is at least as great as the cost of making it. That is the efficient rule.

In a system of private property we need some way of defining what the boundaries of my property are, not only in physical space but in rights space as well - what uses of my neighbor’s property violate my rights in mine and vice versa.

We need some way of determining who owns a particular piece of property and establishing property rights over previously unowned property. We need mechanisms for enforcing these rules and for settling disputes over them.

And all of this must be generalized from the special case of real property - property in land - to the more general case that includes property in things and intellectual property.

Hence property law, including intellectual property. This then is the unseen role that economics plays in law.