Political Economy of Law

Rukamanee Maharjan
Roll No. 14/2065
LL.M. II Year

Background: Political Economy

Political economy is the science of wealth in simple sense and is sometimes defined as the
science of National wealth.1 The science of political economy seems to be rested upon few
notions of an apparently simple character such as utility, wealth, value, commodity, labour,
land and capital.2 The theory of political economy draws heavily on the subject of economics,
political science, law, history and sociology or different closely related branches of
economics to explain the politico-economic behaviour of a country.3 For instance, free trade
between countries is the result of economic and political considerations. Countries may
undertake free trade agreements to promote sale of goods between them which will result in
increased export earnings. It may also lead to specialization on the lines of “comparative
advantage” and large scale production with falling costs. The benefits of the economies of
scale can also be reaped through this process.

The origin of the term “Political Economy” dates back to the period when it was used to
study the way production was carried out in countries born out of the new capitalist system.
More specifically, it was the relation between the production system and law, customs and
the government. 4 The term political "Political Economy" was first coined by the French
Mercantilist Anton De Montchrestein in his "Treatise of Political Economy (1615)" that
primarily referred to the study of the political basis of economic actions. In the 18th century,
the term underwent a major change when the “Labour Theory of Value”5 came into being,
which replaces theories that used to claim “Land” to be the source of all wealth. Moreover,
political economy formerly rested on the writings of Adam Smith (An Inquiry into Nature
and Causes of the Wealth of Nations (1776)), David Ricardo (On the Principles of Political
Economy and Taxation (1817)), John Stuart Mill(Principles of Political Economy with some
of their Applications to Social Philosophy (1848)) and William Stanley Jevons (The Theory
of Political Economy (1871)). However, it should be noted that Hobbes and Locke are
typically linked with the early foundation of political economy as it was the form initially
taken by the political philosophy.

1
Electronic Copy of book- The elements of Political Economy by Francis Wayland.
2
http://www.econlib.org/library/YPDBooks/Jevons/jvnPE1.html#Chapter%201. Last visited on April 4, 2011.
( Ebook- The Theory of Political Economy by William Stanley Jevons)
3
http://www.economywatch.com/political-economy/political-economy-theory.html. Last visited on April 4,
2011.
4
Id
5
The labour theory of value, propounded by David Richardo states that the relative price of two goods is
determined by the ratio of the quantities of labour required in their production. However, this theory requires
several assumptions: 1- both sectors have the same wage rate and the same profit rate; 2- the capital employed
in production is made up of wages only; 3- the period of production has the same length for both goods.
Now, political economy has come a long way from the “invisible hand” 6 of Adam Smith as a
discourse on Capitalism, the theory of “rent”7 of David Ricardo, the “social philosophy”
aspect of J.S. Mill and the “utility as the origin of value” put forward by William Stanley
Jevons. The theory of political economy now encompasses a wide range of subjects from
anthropology to history from psychology to human geography and from law to ecology.8

In this light, it is crucial to make an inquiry 'what is the political economy behind law?', ' how
do the theories of political economy (including positive political theories9) affect laws and
law making process?' and 'Is the law concerned about the promotion of economic efficiency?.
The answer to these questions depends upon the political understanding of a person
responding them. For instance, the believer in the free market and laissez faire economics
will answer in the affirmative in case of the question relating to the law's primarily concerned
with promoting economic efficiency whereas the more left learning individual will counter
that law should be more about justice, rights and redistribution. In other words, such
question-answer relates with the political economy of law. It is because political economy of
law most commonly refers to interdisciplinary studies drawing upon economics, law and
political science in explaining how political institutions, the political environment, and the
economic system influence each other. Likewise, when narrowly construed, it refers to
applied topics in economics implicating public policy such as monopoly, market protection,
governmental fiscal policy etc. In both case, the interdependency vis-a-vis relationship
thereof is clear and obvious.

Political Economy of Law:

As the whole series of the theories of the political economy in one or another way are related
with the science of wealth and associated concepts, the political economy of law revolves
around the interdependent relationship of economic, law and political sciences. In a broader
sense, it refers to the interdisciplinary studies explaining how political institutions, the
political environment, and the economic system influence each other and in a narrow sense, it
refers to applied topics in economics implicating public policy.

In other words, political economy of law pursues a substantially different notion. It seeks to
understand the ways in which society structures its political, economic and legal institutions.
This notion suggests neither a conceptual nor a political concept of law but a social-scientific
one that would help understanding the social world in general, the emergence and persistence
of social groups over time and the causes and consequences of different governmental
structures.

6
Invisible hand, known as invisible hand of the market that is created by the conjunction of the forces of self-
interest, competition, and supply and demand, plays a crucial role in allocating resources in society. This is also
seen as the founding justification for the laissez-faire economic philosophy.
7
Ricardo has developed theories of rent, wages, and profits. He defined rent as "the difference between the
produce obtained by the employment of two equal quantities of capital and labour."
8
Supra note 3.
9
Positive political theory is the study of politics using formal methods such as social choice theory, game
theory, and statistical analysis.
There is one opinion which suggests political economy of law does not directly denote
Marxist Approach to law and neither economic analysis of law put forward by Chicago
School. However, while drilling the notion in relation to the economic determination of law
and the role of law in promoting economic efficiency, both get attached to the political
economy of law.

Regarding the economic analysis of law, it not only advocates that the law ought to be
concerned with economic efficiency, but also claims to put forward a descriptive theory in
which law is simply and straightforwardly concerned with promotion of economic efficiency
and the protection of wealth as a value.10 On the other hand, Karl Marx himself has used the
term 'classical political economy' in order to designate that strand in economic theory
originating in France with 'Boisguillebert (1646-1714)'11 and in Britain with 'William Petty
(1623-87)'12 and reaching its high point with the work of Smith and Ricardo (1772-1823) who
‘gave to classical political economy its final shape’.13 However, the meaning that Marx gave
to 'classical political economy' was different as Marx, as a materialist, understood that the
categories of political economy were a product of historical development and specifically of
the historical development of the social relations of production.14 In this regard, a critique of
political economy and Marxist analysis of law has a great significance.

Notwithstanding things mentioned above, in more specific sense, "the political economy of
law is a branch of Law and Economics that applies positive political theory optimizing
models of individual behavior applied to political decision making to study the development
of law. Positive political theory of Law is primarily a positive theory of rational strategic
behavior in the presence of imperfect information that seeks to explain and predict the
content of the law. These theoretical predictions are derived from information about the
preferences of citizens, elected officials and government civil servants and the design of
relevant political institutions, including electoral processes and the legislative, executive and
judicial branches of the government. It also includes a normative component that evaluates
the effects of the structure and processes of governance in terms of economic efficiency,
distributive justice and democratic legitimacy. It provides a positive theory of the link
between political institutions and policy outcomes."15

Additionally, the political economy of law shares a great deal of relationship with liberalism,
nationalism and even with globalization in today's context as the international political
10
McCoubrey, Prof. Hilaire & Nigel D. White, Textbook on Jurisprudence, (Blackstone Press Limited, 1999,
275-296).
11
Boisguillebert was opposed to the economic policy of Jean-Baptiste Colbert, finance minister to Louis XIV,
who attempted to increase the manufacturing potential of France by keeping agricultural prices at a low level in
the hope that low-wage goods would be an incentive to industry. Like his Physiocratic successors,
Boisguillebert thought that national wealth was dependent on the prosperity of agriculture.
12
His most important theories are on fiscal contributions, national wealth, the money supply and circulation
velocity, value, the interest rate, international trade and government investment. He is attributed as having
started the philosophy of 'laissez-faire' in relation to government activity.
13
http://www.marxists.org/archive/pilling/works/capital/geoff1.htm. Last visited on April 12, 2011.
14
Id
15
Electronic Copy of article ' The Political Economy Of Law:Decision-Making By Judicial, Legislative,
Executive And Administrative Agencies' by McNollgast.
economy of law can been seen with the advent of international and regional organizations
such as WTO.

a) The Economic Analysis of Law

In general, economic analysis of law seeks to answer two basic questions about legal rules.
Namely, what are the effects of legal rules on the behavior of relevant actors? And are these
effects of legal rules socially desirable? In answering these positive and normative questions,
the approach employed in economic analysis of law is that used in economic analysis
generally: the behavior of individuals and firms is described assuming that they are forward
looking and rational, and the framework of welfare economics is adopted to assess social
desirability.

The economic approach to the law (i.e. Chicago School) grew out of the United States in the
early 1960s with work by Ronald Coase, Guido Calabresi and Richard Posner. Likewise, the
economic approach grew out of American Realism with desire to better explain law in terms
of non legal factors such as economics. At the same time, there is somewhat similarity
between the economic approach to law and critical legal studies as 'both treat law as a
political phenomenon; and both undermine the image of law as an autonomous discipline'.
Moreover, it is also true that the economic approach to law is to view it as an improved
model of utilitarianism. Bentham's utilitarianism was based on the 'felicific calculus', the
greatest happiness to the greatest number. The inherent uncertainty of law making within this
method is remedied to a large extent by the economic analysis of law. Additionally, in this
economic approach to law, the assumption is made that human is a rational maximize of his
satisfactions.

Within the framework of the economic analysis of law, Richard Posner is often viewed as the
greatest contributor thereof, not undermining Coase theorem and Calabresi's 'efficiency and
equity'.

i) Coase Theorem16: Coase theorem is based on 'the problem of social cost'. For instance, a
factory is emitting smoke, thereby damaging the laundry hung out at five nearby houses. In
legal terms the question is whether the residents have the right to clean air or whether the
factory has the right to pollute in these circumstances. Human's natural instinct is to favour
the residents in that it is causing the damage. However, for the economists the issue is not one
of causation in that, although the factory has caused the damage, that damage would not have
occurred if the houses were not so close to the factory. In this regard, Ronald Coase observed,
'If we are to discuss the problem in terms of causation, both parties cause the damage.' The
solution of such problem lies in finding 'efficient solution'. The efficient solution depends on
whether there are transaction costs or not. It is not possible to be zero transaction costs and
positive transaction costs are not anticipated. Therefore, the preferred legal rule is the rule
that minimizes the effects of transaction costs.

16
Supra note 10
ii) Calabresi's economic analysis to law17: Calabresi have addressed two issues more
clearly, first the narrow issue of efficiency and second, the nature of a right and the issue of
its distribution. He has listed three groups of reasons for deciding in favour of one entitlement
over another, for instance- the right to clean air over the right to pollute: 'economic
efficiency, distributional preferences and other justice considerations.

iii) Richard Posner's economic analysis to law18: Posner made two claims: first, Common
law legal rules are, in fact, efficient; and second, legal rules ought to be efficient. In both
claims, "efficient" means maximization of the social willingness-to-pay. Later, two more
claims were articulated- third, Legal processes select for efficient rules; and fourth,
individuals respond to legal rules economically. Later, fifth claim was made 'on the best
interpretation of law, common law doctrines promote efficiency'. In more simple form,
Posner argued that the various doctrines of the common law can best be explained as wealth
maximizing. Posner believes that wealth maximization is an ethically attractive guide not
only for the common law but for social institutions generally.

In this way, the economic analysis of law is absolutely correct in one sense that the large
parts of the law are based on the concept of wealth maximization within a free market. It is
because that is the political and economic environment within which the law operates and
which the law facilitates.

b) Marxist Analysis of law19:

Marxist thought is founded upon an economic and political analysis to which legal theory is,
at most, an adjunct. Classical Marxist theory, as developed by Karl Marx and Friedrich
Engels sought a 'scientific analysis of the process of social development'. There are three
separate, but connected, strands of thought within Marx's philosophy:

i) Dialectical materialism: This is a mode of thought based upon a materialist conception of

the universe and the dialectical method, which examines the interconnections of, and
contradictions within, all phenomena. All things are in flux; to understand the laws of change
is essential.

ii) Laws of economic production: Production under capitalism is based on exploitation of

the workers, who have only their labour power to sell, by the capitalists, who own the
instruments to production. Crises are endemic and result in the workers intensifying their
organization so that, eventually their every experiences in the productive apparatus teach
them how to overthrow their exploiters.

iii) Historical materialism: The history of the society is the history of the class struggle. The
mode of production within society conditions the general process of intellectual life.
Revolution will occur only when the contradictions created by the capitalist mode of
production cannot be solved.

17
Supra note 10
18
http://plato.stanford.edu/entries/legal-econanalysis/. Last visited on April 10, 2011.
19
Curzon, L B, Jurisprudence, (Cavendish Publishing Limited, 1993, 133-144).
The basis of society is its economic foundations. Upon the base, society erects a political and
legal superstructure. Ideas, theories, ideologies reflect economic activity. Jurisprudence is no
exception to this rule. Legal institutions, rules, procedures, theories arise in response to the
needs perceived by the ruling class. Law is an instrument of class oppression that benefits the
ruling class through oppression of the proletariat. The state came into existence only when
classes appeared within society. Therefore, after the socialist revolution, classes will
disappear, Bourgeois law will be rendered obsolete and the state will have withered away.

Conclusion:
Market, state, and international community are now in mutual relationship as the world is
getting more advanced in terms of technology, development, commercial transaction.
International political economy that is applicable among the states' relationship and
transactions. For instance, international migration affects employment, income, living
standards and local to international communities along with much influence on globalization
and global political economy. The legal, economic and political regime have been interacting
with each other and affecting each other. In today's context, the political economy of law
directly applies in the connection to the fact that 'economic forces determine government
policies' whether it be local, regional or international level. Though law and economics
movement have failed at many points, the relevance is not reduced at all. Therefore, it is
expedient to study the nexus and intricacies among economics, law and political science in
explaining how political institutions, the political environment, and the economic system
influence each other.

Reference:
1. McCoubrey, Prof. Hilaire & Nigel D. White, Textbook on Jurisprudence, (Blackstone Press
Limited, 1999, 275-296)

2. Curzon, L B, Jurisprudence, (Cavendish Publishing Limited, 1993, 133-144)

3. Ebooks- 'The Theory of Political Economy' by William Stanley Jevons and 'The elements of
Political Economy' by Francis Wayland.