King John and the barons negotiated the Magna Carta in 1215. Three thousand years earlier, Hammurabi enacted his famous code. Law is an ancient discipline. By comparison, economics is young. Adam Smith laid its foundation in 1776 with his masterpiece, An Inquiry into the Nature and Causes of the Wealth of Nations. Since then, economists have studied and influenced policy on many topics. During most of that time, however, economists have not studied or influenced law, at least not in the sense that lawyers use the term.
For lawyers, “law” means more than policy. Law encompasses constitutions, statutes, regulations, treaties, customs, and prior cases. Law involves certain forms of reasoning. To decide if a prior case governs the present case, lawyers reason by analogy. To determine rights and obligations, lawyers interpret law. Through interpretation, judges determine the meaning of law. Interpretation can lead to monumental decisions, as when the U.S. Supreme Court held that the Constitution prohibits racial segregation in public schools.1 According to Alexander Hamilton, one of the Founders of the U.S. Constitution, “Laws are a dead letter without courts to expound and define their true meaning and operation.”
To resolve cases, judges apply law to facts. Prior to the 1960s, economists supplied the facts on some market-related topics. For example, economists might have estimated a company’s market share for a case about antitrust law, or they might have calculated the wages lost by a worker injured in an accident. In cases like these, economists provided the inputs necessary for the operation of law, but little more.
Beginning in the 1960s, the relationship between economics and law changed dramatically.1 Economics expanded into traditional areas of law, especially criminal law, property law, contract law, and torts (the law of accidents). Economists began asking questions like these: Which party to an accident should pay its costs? What is the efficient remedy for a breach of contract? Will harsher punishments deter more crime?
Economics changed the study and practice of law. Today the top law schools in many countries have economists on their faculties; joint degree programs (a Ph.D. in economics and a degree in law) exist at many prominent universities; law reviews routinely publish articles using economics; and several journals devote themselves exclusively to the field. Many areas of law, such as corporate law and bankruptcy, are taught from a law-and-economics perspective. In the United States, prominent law-and-economics scholars have become judges. Professional organizations on law and economics exist in Asia, Europe, North America, South America, and elsewhere. Two economists who helped found the field, Ronald Coase and Gary Becker, received the Nobel Prize in Economics.